South Africa: Central Bank stays put amid unfolding political turmoil
May 25, 2017
The Monetary Policy Committee (MPC) of the South African Reserve Bank (SARB) left the repurchase rate unchanged at 7.00% at its 25 May policy meeting. The decision was in line with market expectations.
The decision to keep the rate put was largely due to better-than-expected inflation which saw inflation returning to within the Bank’s target range. While an overall appreciation in the rand reduced price pressures, the gains in the currency have been eroded following downgrades in the sovereign credit rating by two ratings agencies in April. Upside risks to inflation remain elevated amid high levels of domestic political uncertainty and exchange rate volatility. The Committee expressed renewed concerns about the longer-term outlook, which is preventing it from easing monetary policy to support an economic recovery.
The Bank revised down its GDP growth forecast by 0.2 percentage points in both 2017 and 2018 to 1.0% and 1.5% respectively. Behind the downgrades is the worsening of the country’s sovereign credit ratings and the effect that this is likely to have on investment. In addition, continuing political instability triggered by the ousting of finance minister, Pravin Gordhan, has deteriorated domestic growth prospects and threatens to persist as the struggle for the presidency heats up. An amplification in the crisis could spark a depreciation in the currency which would derail a long-sought decline in the country’s inflation. The Central Bank highlighted the unfolding political drama and high levels of uncertainty as the main risks to the outlook and thus for keeping interest rates steady, but emphasized that this is likely the end of the tightening cycle, and that a sustained improvement in inflation is needed before administering any rate cuts.
Author: Nihad Ahmed, Economist